Malls resurge

But e-commerce a threat in Tier-II, Tier-III cities

While e-commerce and brick-and-mortar stores will continue to co-exist in India, e-commerce currently  has a definite edge over physical retail in India’s Tier-II and Tier-III cities, warns ANAROCK Retail’s report ‘Rebirth of Retail Malls: New, Improved and Revitalized’. The report was released at the India Retail Forum in Mumbai.

The report mentions that India’s Tier-II/Tier-III cities will also be key contributors to the country’s retail growth going forward. The organised retail market is growing at CAGR of 20-25 per cent.

“Nearly 100 million people out of India’s 300-400 million-strong middle class currently live in Tier-II and Tier-III cities,” says Anuj Kejriwal, MD & CEO – ANAROCK Retail. “This indicates that a significant portion of Indian retailers’ target clientele lives in the non-metro cities. In cities such as Jaipur and Surat, household incomes are expected to cross Rs. 800 billion and 26 other cities will cross Rs. 400 billion by 2020. Considering the rising purchasing power and the consumption pattern in these cities, the slow deployment of physical organized retail there is worrisome.”

Tier-II cities alone received investments of more than $6,000 million between 2006 and 17 and Tier-III cities received around $500 million. Tier-I cities collectively saw $1,300 million investments in the same period. The numbers speak for themselves

“Investors and mall developers are beginning to realize the massive potential of these ‘smaller’ markets and trying to make their presence felt,” says Kejriwal. “However, the speed of quality retail deployment must pick up a considerably faster pace to leverage the huge opportunities India’s Tier-II and Tier-III cities offer.”

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Anuj Kejriwal, MD & CEO, ANAROCK Retail: “Nearly 100 million people out of India’s 300-400 million-strong middle class currently live in Tier-II and Tier-III cities. This indicates that a significant portion of Indian retailers’ target clientele lives in the non-metro cities.”

The report warns that the lack of physical outlets is allowing e-commerce to flourish in these towns and cities. This main competitor to physical retail is growing rapidly and is expected to cross $ 100 billion of value by 2020. The major share of online shoppers in India includes millennials (Gen Y) aged 18-35 who currently account for 34 per cent of the population. The high purchasing power of this online shopping population is insufficiently tapped in these cities due to the lack of good quality physical retail spaces.

The report emphasizes that retailers have several advantages in Tier-II and Tier-III cities over Tier-I counterparts:

• Location charges 30-40 per cent lower than in metros.
• Rental values in the range of Rs 40-80/sqft in prime locations as against Rs 150-250/sqft in equivalent metro locations.
• Operating costs 30-50 per cent lower than in metros

While retail sales density in smaller cities will be lower than in metros, adoption of innovative models and diverse product mixes assures retailers not only of survival in tier-II and tier-III cities but also of steady growth.

On a larger scale, the report confirms that the Great Indian Mall Story is alive and growing rapidly. As much as 91 per cent of retail sales in the country are driven by brick-and-mortar stores in India.

• The report warns that the lack of physical outlets is allowing e-commerce to flourish in these towns and cities. This main competitor to physical retail is growing rapidly and is expected to cross $ 100 billion of value by 2020.
• While retail sales density in smaller cities will be lower than in metros, adoption of innovative models and diverse product mixes assures retailers not only of survival in tier-II and tier-III cities but also of steady growth.
• With respect to the quality of the operational mall stock, around 40-45 per cent meet ‘good quality’ requirements, 30-35 per cent of them are in the mediocre range, while the remaining in the weak category.
• The report also examines the syndrome of failed and struggling malls, and envisages re-inventing strategies for retail malls to strengthen their positioning in the evolving digital era.

With respect to the quality of the operational mall stock, around 40-45 per cent meet ‘good quality’ requirements, 30-35 per cent of them are in the mediocre range, while the remaining in the weak category. In the next five years, good quality stock will increase by 10-15 per cent while the mediocre and weak stock may decline by 5-10 per cent, respectively.

The report also examines the syndrome of failed and struggling malls, and envisages re-inventing strategies for retail malls to strengthen their positioning in the evolving digital era. It makes a strong argument for the technology Imperative as physical retail’s only viable means to counter e-commerce competition.

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In a country like India that boasts of a population of 1.35 billion and the rapid adoption of the tech-savvy culture, modernization and innovation are critical for the survival of brick-and-mortar stores.

In the final analysis, the advantage that physical retail has over e-commerce is essentially the ‘experience’ factor. By uniting conventional methods with key success elements of digital experience, brick-and-mortar retailers can offer consumers an experience surpassing that of online shopping.

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